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Auditing procedures form the backbone of reliable financial reporting in the financial services industry—and they're heavily tested because they demonstrate your understanding of how auditors actually verify what companies claim on their financial statements. You're being tested on your ability to distinguish between procedures that assess risk versus those that gather evidence, understand when auditors rely on controls versus when they test transactions directly, and recognize how professional judgment shapes every phase of an audit engagement.
Think of auditing as a structured investigation where each procedure serves a specific purpose in the evidence-gathering chain. The concepts you need to master include risk assessment logic, the relationship between controls and substantive testing, evidence sufficiency and appropriateness, and professional skepticism. Don't just memorize procedure names—know what question each procedure answers and when an auditor would choose one approach over another. That conceptual understanding is what separates strong exam performance from mere recall.
Before auditors examine a single transaction, they must understand the entity and identify where things could go wrong. This planning phase determines everything that follows—the procedures selected, resources allocated, and areas of focus.
Compare: Risk Assessment vs. Materiality Determination—both happen early in planning, but risk assessment asks "where might errors occur?" while materiality asks "how big must an error be to matter?" FRQs often test whether you understand this distinction.
Auditors must determine whether they can rely on the client's own control systems or need to perform extensive transaction testing. The strength of controls directly affects how much substantive work is required.
Compare: Tests of Controls vs. Compliance Testing—tests of controls focus on financial reporting controls while compliance testing addresses regulatory and policy adherence. Both evaluate whether rules are followed, but the rules themselves differ. Know which applies when an exam question mentions banking regulations versus accounting controls.
When auditors need direct evidence about account balances and transactions, they turn to substantive procedures. These tests provide the primary basis for conclusions about whether financial statement amounts are materially correct.
Compare: Substantive Testing vs. Analytical Procedures—both gather evidence about financial statement amounts, but substantive tests examine specific items while analytical procedures identify patterns and anomalies. Strong audits use both: analytics to target risk areas, detailed testing to verify specific amounts.
The value of audit work depends entirely on the quality of evidence gathered and the judgments applied. Auditors must ensure their conclusions rest on evidence that is both sufficient in quantity and appropriate in nature.
Compare: Sampling Techniques vs. Audit Evidence Collection—sampling is how you select items to test, while evidence collection encompasses what you do with those items and how you evaluate results. An FRQ might ask you to design a sampling approach AND explain what evidence you'd gather from selected items.
The audit culminates in reviewing results, forming conclusions, and documenting the work performed. Without proper documentation, even excellent audit work loses its value for quality review and regulatory inspection.
Compare: Review of Financial Statements vs. Audit Documentation—the review is the analytical conclusion about fairness of presentation, while documentation is the record of work supporting that conclusion. Both are required, but they serve different purposes: one faces outward to users, the other faces inward to reviewers.
| Concept | Best Examples |
|---|---|
| Planning Phase | Audit Planning, Risk Assessment, Materiality Determination |
| Control Evaluation | Internal Control Evaluation, Tests of Controls, Compliance Testing |
| Direct Evidence Gathering | Substantive Testing, Confirmations, Inquiry and Observation |
| Pattern Recognition | Analytical Procedures |
| Evidence Quality | Audit Evidence Collection, Sampling Techniques |
| Professional Skepticism | Fraud Detection Procedures |
| Engagement Completion | Review of Financial Statements, Audit Documentation |
Which two procedures both occur during the planning phase but address fundamentally different questions—and what question does each answer?
If an auditor determines that internal controls over loan origination are weak, how would this finding affect the nature and extent of substantive testing in that area?
Compare and contrast tests of controls with compliance testing: what do they share, and when would you use each?
An FRQ describes unusual fluctuations in interest income relative to the loan portfolio size. Which procedure identified this issue, and what follow-up procedures would be appropriate?
Why can't inquiry and observation alone provide sufficient audit evidence, and what additional procedures would strengthen conclusions based on management representations?